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Barron's Feature

Fed Up?

By

William Pesek Jr.

Updated March 1, 1999 12:01 a.m. ET

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N o one was more amused to see Alan Greenspan's picture in People magazine recently than the Federal Reserve chairman himself. With esoteric responsibilities like manipulating interest rates and guiding the world's biggest economy, one would hardly expect Greenspan to join Mark McGwire and Cameron Diaz as one of the 25 most intriguing celebrities of our day.

Few are more aware of the spotlight's glare than Greenspan these days. To some extent, his high profile reflects the Fed's growing role in the lives of the average American. But mostly, it speaks to the unusual amount of trust markets and government officials place in the hands of this 72-year-old economist. Certainly, his deft handling of last year's near-meltdown in global markets explains why many folks sleep better knowing he's at his post.

But despite all that, will Greenspan soon be shown the door? The Fed chief's current term ends June 20, 2000, and insiders believe he's open to serving a fourth four-year stint in the chairman's seat. Yet Wall Street and Washington are abuzz with talk Greenspan has jeopardized his chances for reappointment by his open criticism of the Clinton Administration's Social Security scheme.

While Greenspan's objection to the notion of investing Social Security funds in the stock market is consistent with his free-market instincts, it's apparently not sitting well with the man who may decide his future: Al Gore.

Greenspan's term ends before the November 2000 election, but Fed watchers think President Clinton would merely delay the nomination process so that his successor could pick his (or her) own Fed chairman. If Gore wins, he may want a new top dog at the Fed.

More surprisingly, even if the GOP front-runner, George W. Bush, were to win next year, Greenspan could still be out of a job. A long-time Republican, he served as Chairman of the Council of Economic Advisers in the Ford Administration and originally was named to the Fed chairmanship by President Reagan.

"I'm not sure people fully understand Greenspan's jeopardy," notes Lawrence Kudlow of American Skandia, who's been advising his firm's clients to brace for a new Fed skipper.

Fed dynamics in 2000 will be unique. For the first time in U.S. history, a Fed chairman's term will expire on the eve of a Presidential election between two nonincumbents, observes Tom Schlesinger of the Financial Markets Center. "It throws a big element of uncertainty into the mix come election season," he says.

In the wake of his impeachment, Clinton hopes overhauling Social Security will provide a less ignominious legacy for his Presidency. Gore may want to campaign on the issue. But Greenspan's aggressive criticism poses a major roadblock. Given his immense influence over lawmakers, the putatively second-most powerful person in Washington is emboldening Republicans to line up against the idea. Gore is said to be annoyed by the episode, and may prefer someone else for the top Fed job, say Treasury Secretary Robert Rubin or Lawrence Summers, the Treasury's No. 2 man.

Gore's reluctance to stick with Greenspan may go beyond hard feelings. Most economists give him much of the credit for the economy's performance. But in their comments about the economy, Clinton and Gore never mention Greenspan's achievement of virtual price stability as even making a contribution to what's shaping up to be the longest peacetime expansion in U.S. history. So it's not clear that Gore would view replacing Greenspan as a problem for the economy or markets.

Fed watchers also fret that Greenspan's reluctance to ease credit more aggressively during the 1991 recession would pose reappointment problems if Bush, the Texas governor, wins. Last year, his father, former President Bush, blamed Greenspan for his 1992 election loss. (Breaking his famous "Read my lips, no new taxes" promise, of course, had nothing to do with it.) And while Governor Bush's feelings on monetary policy remain a mystery, "the political DNA apple never falls far from the family tree," observes Kudlow, a former assistant budget director in the Reagan Administration.

But clearly, Greenspan's handling of the economy since 1987 deserves high marks. Growth remains in the 4% range, inflation is tame, unemployment is low, and stocks are on the moon. Even populist Democrats with a history of criticizing the Fed -- including Rep. Barney Frank of Massachusetts -- praised Greenspan's job when the chairman appeared on Capitol Hill last week. Indeed, his talents and success to date help shield him from political forces.

"The man has done so well and is held in such high esteem that it will be very hard not to keep him on at the Fed," says David Jones, longtime Fed watcher at Aubrey G. Lanston. "This would be a problem for the markets."

Like "Coke" for cola and "Levis" for jeans, the word "Greenspan" has become synonymous with adept policy. Moreover, his is a household name and one that increasingly pops up in the jokes of late-night comics like David Letterman. His visage has become a favorite target of editorial cartoonists. His 1997 wedding to NBC reporter Andrea Mitchell attracted a swarm of paparazzi. Fans have even created a Greenspan Website called "Get Exuberant," an allusion to his now-infamous warning about stock prices being inflated -- some 3,000 Dow points ago.

Particularly on Wall Street, the thought of life without Greenspan is a frightening one for many. The vast majority of today's bond traders and stock brokers have never participated in markets that Greenspan didn't have a hand in influencing. And while no Fed chairman is irreplaceable -- a lesson learned when the then-seemingly indispensable Paul Volcker left in 1987 -- the man who for 11 years has held the reins of the world's most powerful central bank will be a tough act to follow.

"The Greenspan Fed deserves high marks," notes former Fed Governor Susan Phillips, now a dean at George Washington University.

Who might succeed the Fed chairman? The list is a short one. The obvious choice is Rubin, whose financial market experience and Wall Street-friendly management of the economy would make him a shoo-in for the job. The question, of course, is whether the 60-year-old Treasury chief wants the job. Even to Rubin's closest confidants, this question remains unanswered.

Summers is also at the top of the list, though Fed watchers think he'd be better suited to succeed Rubin at Treasury. Few believe Rubin will stay on until Clinton leaves office, and Summers is seen as a natural replacement. It's also no secret that Rubin hopes his deputy gets the nod to follow through on the Treasury's key initiatives, such as supporting the International Monetary Fund, stabilizing and opening international markets and maintaining a strong dollar.

But Fed watchers see less chance of Summers succeeding Greenspan. A brilliant Harvard-trained economist, the 44-year-old lacks hands-on Wall Street experience, which could raise some concerns in the markets. Also, his relationship with Gore hasn't always been warm, although the former World Bank official has worked dutifully to improve relations.

The biggest snag, however, may be the enmity toward Summers on Capitol Hill, where his famously underdeveloped people skills have rubbed more than a few the wrong way. While he's worked hard to rehabilitate his image, Republicans remember Summers accusing them of "selfishness" for proposing cuts in estate taxes in April 1997. Summers' dogged support for the Mexican bailout in 1995 and recent IMF efforts in Asia, Russia and Brazil also have enraged some in the GOP. Also, a recent Time cover story left the impression that Administration officials were trying to position Summers for the top Treasury slot.

Beyond Rubin and Summers, handicapping the candidates from the Democratic side gets dicey. Fed insiders think New York Fed President William McDonough would get a serious look from the Gore camp. He's a Democrat and runs the most influential district bank in the Fed system. The name of Governor Laurence Meyer -- like Greenspan, a well-respected private-sector economic forecaster before joining the Fed -- also may be on Gore's short list. The same is true of Vice Chair Alice Rivlin, who previously headed the Congressional Budget Office, though there's little precedent for the Fed's No. 2 official moving into the top spot.

The wild card is Princeton economist Alan Blinder. The former Fed vice chairman left Washington in 1996, complaining that the Fed's inner circle never embraced him. Increasingly, Gore is said to be taking a shine to Blinder, and Fed insiders don't rule out such a candidacy.

How a Blinder appointment would sit with Fed staffers and markets is uncertain, however. He's seen as an eminent economist, but one who's had difficulties in the past shifting from academia to the give-and-take of real-world policy making.

If Bush gets to fill the chairman's seat, insiders say former Fed Governor Lawrence Lindsey would get a serious look. Lindsey, who left the Fed in 1997, has credibility with investors, and Governor Bush recently tapped the 44-year-old to advise him on economic policy. Bush has also been consulting with Stanford professor Michael Boskin, chairman of the Council of Economic Advisers in his father's Administration. Some Fed watchers think Boskin would join Lindsey at the top of Bush's Fed wish list.

The issue of who will run the Fed in 2000 may garner unprecedented attention. Years ago, as Herbert Stein likes to say, folks on Main Street didn't much care who chaired the Fed. But these days, the central bank's rate decisions hit close to home, either literally as millions of Americans have become adept at refinancing their mortgages at the drop of a few basis points, or figuratively as more families' wealth is tied up in the stock market than at any time in history.

Indeed, the surprise news in a recent Gallup poll published in National Journal was not that 57% of Americans have a favorable view of Greenspan; it was that only 17% didn't know who he was.

Not bad for a man many figured would be history just a few years ago. To many, Clinton's move to keep Greenspan at the Fed in 1992 and 1996 was as savvy as it was extraordinary. The chairman's tight policies were thought to play an important role in the economy's snail-like recovery from recession in the early 'Nineties. So when Clinton not only stuck with Greenspan but took his advice to rein in the deficit rather than embarking on his original plan for fiscal stimulus, Wall Street rejoiced.

Today, those decisions are considered to be among Clinton's most important contributions to American prosperity. The respect accorded Greenspan was on display last week when Senate Banking Committee Chairman Phil Gramm (R-Texas) introduced him as "the greatest chairman in the history of the Federal Reserve." But as Winston Churchill found out shortly after World War II, even so vaunted a reputation may not be enough to win another term.

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